Mutual funds (MFs) may only engage in unlisted shares as anchor investors prior to an initial public offering (IPO), according to the Securities and Exchange Board of India (Sebi), which has prohibited MFs from taking part in the pre-IPO placement of equity shares.
Pre-IPO placements are made in the months before the listing, while an anchor allocation is made the day before the IPO opens to the public.
Listed and to-be-listed shares are available for MF investment, according to MF laws. The fact that pre-IPO placements take place prior to listing has raised questions about whether mutual funds may take part in them, even though the rule makes no mention of them.
The Association of Mutual Funds in India (Amfi) received a letter from Sebi arguing that MFs’ involvement in pre-IPO placements is dangerous since it may result in MF schemes owning unlisted shares.
Even when pre-IPO placements happen after the offer document is filed, an IPO may still be delayed or even canceled. In these situations, investors can wind up owning unlisted shares for an indeterminate amount of time, which is against the rules for mutual funds.
In the letter that Amfi sent to all of its members, Sebi stated that “if the mutual fund schemes are allowed to participate in pre-IPO placements, they may end up holding unlisted equity shares in case the issue or listing cannot be concluded for any reason, which would not be in compliance with the said clause.”
For fund managers, the pre-IPO rounds are profitable since they often occur at a lower cost than the IPO. These investments often aid in improving the schemes’ performance.
Although regulatory uncertainty has restricted MF involvement in pre-IPO rounds, several fund managers were considering the possibility. SBI MF recently took part in Urban Company’s pre-IPO round.
The limitation on MF involvement coincides with a downward trend in pre-IPO placements. Other pooled investment vehicles, including family offices or alternative investment funds (AIFs), may be able to take a bigger portion of these placements as a result of the shift.
Thirteen companies used pre-IPO offerings to raise a record Rs 1,074 crore in 2023. In 2024, however, this number fell to eight companies earning Rs 387 crore. Meanwhile, seven companies have raised Rs 506 crore so far this year.
The closing valuation gap between pre-IPO and IPO pricing is partly responsible for the recent drop in the quantity and value of these transactions.